Statement by an IMF Staff Mission in Uganda

An International Monetary Fund (IMF) mission led by Mr. Roger Nord visited Uganda October 20-31, 2008 to conduct the 2008 Article IV Consultation and the fourth review under the Policy Support Instrument (PSI). The mission met with Minister of Finance, Planning and Economic Development, Hon. Ezra Suruma; Minister of Energy and Mineral Development, Hon. Daudi Migereko; Governor of the Bank of Uganda, Mr. Emmanuel Tumusiime-Mutebile; Permanent Secretary/Secretary to the Treasury Mr. Chris M. Kassami; Chairman of the Budget Committee of Parliament, Hon. William Oketcho; and other senior government officials; private sector representatives; and members of civil society.

The mission issued the following statement in Kampala today:

"Uganda's economy continued to perform strongly in 2007/08. Economic growth reached 9¾ percent (at market prices), fueled in particular by a robust expansion in the construction and services sectors. Exports grew by over 50 percent, contributing to a further increase in international reserves of the Bank of Uganda; fiscal policy remained prudent, anchored by strong revenue performance; and credit to the private sector expanded at a record pace.

"More recently, however, Uganda has been buffeted by two major shocks. First, inflation has risen sharply over the past nine months and has remained persistently above the Bank of Uganda's target, mainly as a result of the pressures from the international fuel and food price surge. Second, the sharp global economic downturn, the magnitude of which is still uncertain, cannot but have an impact on Uganda's small, open economy, mainly through reduced demand for its exports and a slowdown in the inflow of foreign investment.

"As a result, the IMF staff estimates economic growth to slow, albeit to a still healthy 7-7½ percent in the 2008/09 fiscal year. There are no indications that the Ugandan banking sector has any direct exposure to the toxic debt that has affected global financial markets, and banking soundness indicators appear healthy. Nonetheless, going forward, it will be important to step up prudential supervision to ensure that any emerging risks are identified early and addressed expeditiously.

"Monetary policy will need to be guided by the objective of returning core inflation to 5 percent. The decline in international food and fuel prices, if sustained, will help. However, in the short term, the lingering impact of earlier price rises and the effects of recent depreciation of the shilling will delay the achievement of the inflation objective. In the meantime, the Bank of Uganda will need to continue to restrain liquidity growth, while ensuring that sufficient credit is available for the private sector.

"The framework of the 2008/09 budget remains appropriate. The slowdown in the global economy, and its repercussions on Uganda, will make achieving the targeted revenue increase more challenging. Nevertheless, it will be important to sustain critical spending, notably on road infrastructure projects needed to enhance Uganda's medium-term growth potential. Fiscal policy should therefore use any available scope to cushion a temporary revenue shortfall, guided by medium-term macroeconomic stability considerations.

"The international environment can be expected to be more challenging in the coming years, which may affect the financing of investment projects, underscoring the need to ensure value for money in public spending. But provided Uganda maintains its growth momentum, its strong economic fundamentals should allow it not only to weather the storm, but to emerge stronger from it.

"It is expected that the IMF's Executive Board will discuss the 2008 Article IV Consultation and the fourth review under the PSI in early January 2009."